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The rating of environmental, social, and governance corporate performance and its relationship with credit risk assessments

Dimaki Eleni

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Summary

Every period sets at the heart of it a different issue. Talking in 2020, in a world which is characterised by major socio-economic and technological changes, companies constitute a decisive part. Typically, it is assumed that a firm’s sole goal is to maximise its shareholders’ wealth. However, it is now acknowledged among professionals and academics, that the value of a firm encompasses various dimensions, which extend beyond typical financial aspects. For instance, it is commonly accepted that if the environment is not able to support the actions that are being held on that, nothing can mark long lasting success. Moreover, issues such as human rights and social values have attracted major interest. In this context, the operation of any corporate organisation and its financial performance should be aligned with global and regional policies that target towards sustainable development. Therefore, the integration of factors related to sustainability, the environment, as well as social and corporate governance issues (ESG) into the operation of firms is an essential prerequisite for their success. The present dissertation examines the contribution of ESG factors in the areas of investment decision making, corporate finance and banking, and credit pricing. To this end, a survey is conducted to investigate how international financial institutions (IFIs) incorporate ESG factors in their actions. ESG is a topic that continues to gain significant interest among investors and entrepreneurs, and it is expected that this trend will be strengthened in the upcoming years, as sustainable development is set at the heart of global policies. Except for IFIs, the thesis also seeks to examine the ESG factors that are typically used by global ESG rating agencies, in an attempt to formulate a comprehensive framework for deriving such ratings through a systematic process. The evaluation of corporate ESG performance through a common methodology and criteria is supported from the European Union (EU). In that direction, the biggest 22 ESG rating agencies were considered through a questionnaire study, aimed towards the clarification of the way that raters use ESG factors in deriving their ratings. The overall structure of this dissertation comprises 6 chapters, including the introduction part. The second chapter refers more extensively to the meaning of ESG by making a brief historical reference and understanding about how ESG has involved in investment decision making, in corporate finance and banking, and how ESG assessments affect credit pricing. At this point, an extensive analysis regarding the EU Sustainable Finance Framework was made, emphasising on EU Taxonomy, EU Non-Financial Reporting Directive, on EU-Benchmarks and on EU Green Bond Standards. Section 3 presents an overview of ESG scores and ratings and their uses. In addition, a description of the 22 most important ESG rating agencies is given. Chapter 4 covers the ESG methodologies and the importance of the factors involved in the evaluation of ESG performance. The relation between ESG ratings and IFIs is also discussed in chapter 4, along with the emerging trends in ESG ratings. Chapter 5 presents the empirical analysis of the survey data and discusses the obtained results. The last chapter concludes the dissertation and proposes some areas for further research.

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